ATRenew Grows Outside the Smartphone Box with Luxury Bags, Watches and Liquor

Key Takeaways:

• ATRenew’s sales from non-smartphone categories are showing initial success, accounting for an extra 300,000 yuan in monthly sales per store and 0.5% of transaction volume
• The smartphone recycler reported its first non-GAAP net profit in the third quarter as its margins improved on cost controls and growing focus on direct sales to consumers

By Doug Young

In these increasingly difficult times, who needs an overpriced new bottle of vintage Kweichow Moutai liquor or a fancy watch when you can get a pre-owned one of similar quality for far less?

That question may sound cheeky to most, but it represents a major new business opportunity for recycling specialist ATRenew Inc. RERE. The company’s latest financial results released last week revealed its addition of vintage spirits, as well as watches, to the growing list of categories it has added to its roster this year as it expands beyond its original business recycling smartphones.

The company’s early efforts at leveraging its brand to a wider range of products looks especially intriguing as China heads into its first major economic slowdown in modern times, which has many people reining in their spending. As that happens, many will inevitably consider second-hand products as a cheaper alternative to new ones, especially for items like liquors and luxury goods that are often far cheaper when purchased as used rather than new items.

At the same time, the company could be well-positioned to benefit from a growing tide of budget-conscious consumers looking to raise some extra spending money by trading in their old smartphones, luxury goods, gold jewelry and now unopened bottles of vintage spirits.

“In an unfavorable market environment and facing various headwinds, our monetization capability once again demonstrates the counter-cyclical nature of the circular economy,” said ATRenew founder and Chairman Kerry Chen, referring to the recycling industry on the company’s investor call. “As consumer spending faces downward pressure in this economic cycle, user willingness to recycle increased in some cities.”

ATRenew’s latest results also featured some encouraging new financials that show the company is inching closer to net profitability as sales rebound from a weak second quarter. It reported a profit on a non-GAAP operating basis in the latest quarter through September – its third such quarter of profitability on that basis in the last four. But perhaps more significantly, the company also reported its first-ever profit on a non-GAAP net basis since its U.S. listing in June last year. It also indicated that situation would continue to improve.

“We’d also anticipate a non-GAAP operating income in the fourth quarter and realizing a profitable year under non-GAAP (operating) basis as we forecasted,” CFO Rex Chen said on the call. “Looking ahead, we expect our total revenues and profitability to further escalate in the coming quarters.”

While the report’s tone was largely upbeat, investors were less impressed. ATRenew’s shares fell 3.5% the day the results come out, though the broader Nasdaq Golden Dragon China Index was also down 1.4% on the day. The stock is now down more than 70% year-to-date, reflecting broader bearish sentiment towards U.S.-listed Chinese stocks.

Despite realizing 29.2% revenue growth and non-GAAP profitability in the third quarter, ATRenew trades at a price-to-sales (P/S) ratio of 0.37. While that looks low, refurbished clothes seller Rent the Runway RENT trades at an even lower P/S ratio of 0.28. Used car seller Carvana CVNA is outright anemic with a P/S of just 0.10, reflecting just how bad overall market sentiment has become this year. One of the few standouts in the crowd was fashion social marketplace Poshmark POSH, whose P/S still stands at a relatively high 3.93.

Cash in new categories

ATRenew embarked on its category expansion earlier this year, seeking to leverage its reputation as a professional recycler built over the last decade. The company tantalized investors with its first public disclosure of financials for those “other” categories, which began with luxury goods and photography equipment, and has now expanded to include watches, gold and the vintage liquors we mentioned earlier.

Management revealed on the call that the non-smartphone categories are being offered at 50 of the company’s self-operated stores, and are now contributing an extra 300,000 yuan ($42,000) in transaction value for each of those stores per month. Just as important, that business is also contributing 20,000 yuan in additional profit monthly for each participating store.

Extrapolating those numbers to a quarterly basis for 50 stores yields an additional 45 million yuan in company-wide transaction volume. On a similar basis, the monthly profit figure translates to 3 million yuan in additional quarterly profit, equal to 3.9% of the 77.4 million yuan the company reported in adjusted net income during the latest quarter.

Management said it plans to expand the new categories to over 150 of the company’s self-operated stores, or a quarter of its self-operated network, in the not-too-distant future – a significant boost for a business that just began this year.

Next, we’ll return to the present by reviewing the company’s latest quarterly numbers, which showed its business was returning to more normal levels after a sharp downturn due to China’s strict Covid-control measures in the second quarter. ATRenew’s revenue grew 29.2% year-on-year to 2.54 billion yuan in the third quarter, rebounding from just 14.9% growth in the second. It forecast the rate would come down slightly to between 2.93 billion yuan and 3.03 billion yuan in the fourth quarter, which translates roughly to 22% growth at the midpoint of that range.

The company reported a 10.8 million yuan profit on a non-GAAP operating basis for the quarter, returning to profitability for that metric after it fell to a loss in the previous quarter. And its 77.4 million yuan adjusted net income, which typically excludes employee stock compensation costs and some other items, marked its first-ever profit on that basis post-IPO. But it remained in the red on a GAAP net basis, reporting a 30.1 million yuan quarterly loss, compared with a 121.7 million yuan loss a year earlier.

The company’s latest non-GAAP operating margin showed strong improvement, rising to 0.4% in the third quarter from negative 1.5% a year earlier. Part of that was due to cost controls and greater automation, which will get a further boost in future quarters following the October launch of the company’s second regional automated operation center in southern Guangdong province.

An equal contributor to the margin improvement was ATRenew’s shifting strategy to the higher-margin business of selling products directly to consumers rather than to other merchants. That development is becoming more feasible and is likely to accelerate following this year’s rollout of a pilot plan providing guidelines for repair and refurbishment in the southern boomtown of Shenzhen – which could be expanded nationwide later – to standardize electronics recycling.